When it comes to retirement planning, we often focus on savings rates and investment strategies, but what are you supposed to do when markets go south? Join host John as he guides us through actionable steps to safeguard our financial well-being in the face of unpredictable market conditions. (1:43) Plus, learn the critical documents every college student should have in place before they return to school (19:19) and how we can achieve better long-term outcomes when we focus on small achievements. (46:38)
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
John Hagensen: Welcome to the Rethink Your Money podcast presented by Creative Planning. I’m John Hagensen, and ahead on today’s show, how you can manage volatility leading up to retirement as well as one of the most overlooked aspects of estate planning. And finally, I’ll answer a listener question related to whether or not they should pay off their mortgage. Now, join me as I help you rethink your money.
I want to start with a story about my mother-in-law. No, not that kind of in-law story. My mother-in-law happens to be great. She was in town visiting, seeing our kids. One of our kids had a birthday. She flew in and surprised them and she just left for the airport a few hours ago. What I found interesting though is she left three hours before her flight. The airport’s maybe 15 minutes from our house. She told me, “Well, you know how with traffic and trying to time things, you just never know.” And let’s be honest, she may have just wanted to get there a bit early, put an AirPod in, get a Wetzel pretzel and chill a little bit after being with our giant family for the last five days. I get it. And I also understand that it’s difficult to time things perfectly in life.
I mean, the airport is a perfect example. We’ve all been stressed out in the TSA line that’s not moving, looking at the time wondering if we were going to make our flight. That’s a terrible feeling. And every time you’re in that you think to yourself, “Why didn’t I just leave 30 minutes earlier? This is so stressful. Why? This was dumb.” So, I’ll defend my mother-in-law a little for the excessive early departure. But when I think of the perfect timing when it comes to the financial markets, I think of probably the most common and impactful from a negative standpoint aspects of personal finance.
In fact, the odds are so far stacked against you that it boggles my mind that people still try to time the market, and I see it often. People sitting in cash, “I just think the market’s going to go down. It seems high.” So you’ve got your entire life savings sitting in cash. That’s simply not rooted in any data.
And I want to break this down for you and provide three reasons why timing the market is so difficult. In fact, James Norton over at Vanguard wrote a great piece on this. Your chance of underperforming if you switch your investments to cash … and by the way, the investment portfolio I’m using is a 60/40 balanced portfolio … over a one-month period, 57%. Over a three-month period of sitting in cash rather than staying invested in that 60/40, your likelihood of underperforming rises to 61%. And obviously the longer that you stay in cash, the higher the likelihood is that you will underperform because the stock market, while volatile in the short run, generally works back to its average of about 8-12% per year given enough time, and we certainly don’t expect cash to be earning that. If you decide to time the market, you better watch it closely because the odds, if stagnant, I just shared them with you. You’re going to lose.
So you’re trying to game the system, you’re trying to get an edge. The problem with that is, even if you’re watching it closely, is that the best and worst days in the markets tend to occur close together. If you want to have your mind blown, just consider this. Over the last 40 years, 12 of the 20 best trading days occurred in years with negative returns. By comparison, six of the 20 worst trading days occurred in years with positive returns. And sometimes those worst days come entirely out of the blue, as was the case with the Black Monday crash of 1987. And what caused Black Monday is still debated to this day, but many blame internal market dynamics with the introduction of automated computer trading. So we’re sitting here 35 years later and we still can’t agree what even happened on Black Monday, so you can see it’d be pretty hard to predict it happening at all, wouldn’t it?
Furthermore, geopolitical selloffs are typically short-lived. If you take eight of the worst geopolitical scenarios that we’ve recently seen, the markets were higher six and 12 months later in six of the eight worst scenarios with Russia’s invasion of Ukraine and the impeachment of Nixon, the only two where markets were lower still a year later. That’s why timing the market’s so hard. The entire world is shut down from a virus. We’ve just seen the fastest bear market in the history of the stock market. Maybe I should sell my investments, and the market recovers over 100%, barely before you could blink an eye. That bear market only lasted two months, the shortest in history. And so if you break this down and really think in bets, when you time the market you’re really making three separate bets.
Bet number one is that the odds are with you, that you’re going to be vindicated by your decision to sell. Do you really know better than the combined wisdom of all other market participants that have established that price? Well, that’s the first bet.
The second one is the reason for the markets going down. You might have good cause to think that the market will fall, but as I just explained with geopolitical events, the market shrugs it off a lot of the time and there may be much wider events at play than the isolated negative one that you’re focusing on.
And then your third bet, which I find to be the most nerve wracking of all, is when the heck are you getting back in the market? Even if you happen to be right on number one and two and you defy all the probabilities and you’re correct and the market’s down, it can often only reinforce your negative bias and your fear, which makes it very difficult to figure out when to get back in. And that’s why for most people it’s generally best to stay invested. And if you have questions about your investments, we have local wealth managers just like myself, credentialed fiduciaries here at Creative Planning, not looking to sell you something but rather give you clarity around your most important personal finance questions. To meet with us, visit creative planning.com/radio now. Why not give your wealth a second look?
Let’s pivot from timing the market to properly timing your retirement. I want to give you four tips to help mitigate sequence of returns risk, and I will post an article to the radio page of our website that expands on this further. What I’ve found as a wealth manager is when people plan for retirement, they often consider savings rates, which they should, net worth, investment performance. But there’s another really important aspect of retirement that you need to consider, and that is the timing of when you retire and what’s happening in the world of finance and the economy around you at that time. Because deciding when to retire and then how that timing impacts your investments can make a big difference on your long-term financial wellbeing. What I’m referencing is called sequence of returns risk, and that’s the risk of basically being forced to withdraw money from your portfolio early in retirement during a market downturn.
What happens is that you’re forced to sell out of your equities that are at a decreased value because the market’s down, which then requires you to sell more shares to net the same amount of proceeds. So the share price is lower of course, which can cause you to drain your retirement savings much more quickly. And in addition to this loss, you’re removing assets from the market that could otherwise have been generating growth as the market recovers, so the losses are permanent. And this move can be devastating when it happens early in retirement, in particular.
Let me give you an example of this. Two retired investors that have a million dollars in savings. They both decide they’re going to take a 5% withdrawal rate, so they’re taking $50 grand out per year and they’re going to increase that $50,000 by 2% each year of retirement to account for inflation. Now both of these investors are going to have a 15% market drop, but investor one is going to have that drop occur in the first two years of retirement. Investor number two also going to have to experience that drop, but for investor two, the drop is going to occur in year 10 and 11 of retirement instead of the first two years.
Well, investor one is out of money within 20 years. Investor two still has $400,000. How can that be? It’s a little bit mind-boggling, right? They had the same returns. The order or sequence just happened to be different. Well, yes, that’s absolutely the case. When you are making withdrawals, how that order of withdrawals coincides with market returns has a huge impact on whether you’re living in your kids’ basement or leaving a $1 million inheritance. And it didn’t have to do with investor one being smarter than investor two,. They just happened to be a different age and therefore retired at different times in different market environments.
As a side note, this is one of the reasons in addition to a much longer time horizon, why as a younger accumulating investor you are able to accept more volatility because that order when you are not taking withdrawals has no impact. So on a static portfolio, you could jumble up that sequence of return and both investors, if they were invested the same, would have down to the penny the exact same amount of money, which is why managing sequence of returns risk is so critical as you approach retirement. So rather than you throwing your hands in the air and saying, “Well, I can’t control the markets and I can’t control the economy, so I guess I just hope that I retire, John, at the right time,” no, no, no, that’s not what I’m saying. There are strategies to help mitigate this risk that absolutely is out of my control and out of your control.
Here are a few things you can do to manage that sequence of returns risk. Number one, maintain a short term investment account. When you are nearing a period of time where you expect a high likelihood that you will be taking withdrawals from your accounts, you should be maintaining around a five-year cushion of those income needs in short term semi-liquid and investments. Right now, government treasuries are paying around 5%, and having that short-term allocation to bonds prevents you from being forced to sell equities at a loss when the market’s down. You need a buffer. You need a cushion so that your stocks have time to work back to their averages.
Another tip is you can use bond laddering. So this involves purchasing a variety of bonds with different evenly spaced maturity dates that span over a specific timeframe. So for example, let’s talk about a five-year bond laddering strategy where you purchase a bond that matures in one year, another bond that matures in two years, one that matures in three years, one in four, and one more in five.
By doing this, you receive income each year for the next five years that you can use to fully fund your daily living expenses without any need to worry about stock market volatility. Of course, the most common buzzword in all of investing, you manage sequence of returns risk by diversifying. You make no big bets in any one spot, whether it be asset classes, individual securities sectors. This helps smooth out overall volatility, which isn’t just for your sleep factor. No, no, when you’re taking withdrawals, it is fundamentally and technically sound to do so because this will lead to a lower standard deviation of the portfolio, meaning less gyrations up and down, which will help you avoid selling big losers at the wrong time.
And then lastly, establish and also stick to a withdrawal strategy. Any good certified financial planner fiduciary that you meet with that’s not looking to sell you products or shove proprietary or advantage products down your throat, but actually give you advice, can help you establish an appropriate strategy that takes into consideration your current financial situation, your retirement goals, tax situation, your social security strategies, your estate planning desires, your risk management situation, your risk tolerance. And that written documented financial plan that incorporates all of those aspects of your financial life will help drive the specific strategies to get you into and through retirement, and not just so that you’re limping to the finishing line but thriving in retirement, having peace of mind, having clarity that you’re on track.
If there’s only one thing you take away from the show, I want it to be that you must have a financial plan. Not everyone needs a financial planner, but everyone needs a financial plan. And if you are not sure where to turn, meet with us here at Creative Planning. Speak with a local wealth manager just like myself. We can help assess your current plan to make sure that it’s on track and that you’re not missing anything, or for the first time in your life, help you construct that detailed financial plan. Do not enter retirement risking for yourself and for those that you care about everything you’ve worked a lifetime to save by not having a plan. Visit creativeplanning.com/radio now for a complimentary visit with a local financial advisor. Again, that’s creativeplanning.com/radio because we believe your money works harder when it works together.
Well, I don’t know about you, but I am not a big surprise guy. I don’t want to be surprised, which probably unfortunately has to do with my controlling nature. I like to be a planner and have things figured out and analyzed, and surprises throw a wrench in that. But if I’m going to be surprised, I sure hope it’s a good surprise. I’m okay finding the $20 bill in the dryer. The occasional surprise birthday that gets pulled off, great. And that’s essentially what the stock market has done the first half here of 2023. Our Chief Market Strategist at Creative Planning, Charlie Bilello, provided a webinar for our clients that I’ll post to the radio page of our website at creativeplanning.com/radio if you’d like to view it yourself, where he spoke specifically on the 10 greatest surprises for the first half of the year.
And in the event you haven’t really been paying attention, because you have a life and you’re not fixated on the stock market, which is great, by the way, you might have missed the Nasdaq is up 35%. Small-caps up about 10%, mid-cap 11, S&P up 18%. Broad international markets? They’re up over 15%. There has certainly been some turmoil and some volatility, but despite that, if we zoom out a bit further, the market as measured by the S&P 500 is up over 60% the last five years. Last 10 years, it’s up over 170%. Last 15 years, 260% and over 300% up over the last two decades.
Now, the longer term performance numbers should not be a surprise because the stock market has earned around 10% per year for the last 100 years. Now, what is inherently unpredictable is when those return premiums occur, how long you have to wait for them and what will happen over the short term. Well, here are the 10 surprises from the first half of the year.
First off, the recession that wasn’t. In late 2022, nearly everyone was in agreement. Certain studies said there was a 100% chance, which I don’t even know how that’s possible, that we were headed for a recession in 2023. Well, in the first quarter, Real GDP was positive, up 2% annualized, and the current expectation for the numbers coming out of the second quarter will be as well according to the Atlanta Fed. A key driver in that growth has been the continued strength of the labor market. 30 consecutive months of job gains and an unemployment rate that has now hit a 54-year low in April at 3.4%.
Second great surprise, the fortitude of the stock market. At the end of 2022, the stock market outlook was as bleak as bleak could be following last year’s 19% slump in the S&P 500. But what actually transpired was one of the best starts to a year in history with the S&P up nearly 16% in the first half.
Another surprise were the collapsing banks, which sent shock waves all across the financial world. But just days later, the 167-year-old Swiss banking giant, Credit Suisse, ended up being taken over by UBS. We also saw higher rates for longer than expected in the first half of 2023 after the markets were completely shocked in 2022 with the fastest interest rate increase in four decades. The Federal Reserve continued to tighten policy in 2023 in a bid to tame inflation. Most rate cut expectations have been pushed out into 2024, and I quote Charlie in saying “Higher for longer seems to be the new mantra.”
A great surprise was the inflation pullback. Fears of the inflationary spiral of 2021 and ’22 continuing into this year haven’t materialized, thankfully for us. We’ve now seen US consumer price increases fall for 11 straight months down toward 3%, which is pretty incredible considering last year’s peak of 9.1%.
We’ve seen a surprisingly resilient housing market. I mean, the early part of 2023 was marked by mounting pessimism toward this housing market with elevated mortgage rates eroding affordability. The consensus prediction really was home prices are going to tumble. Well, if you were someone on the sidelines waiting for that drop, hoping the real estate market would correct so that you could enter the market at a better price point, this has been a bad surprise for you.
For those already owning homes, it’s been nice to see housing prices remain stable. And the biggest reason for that is there’s been a major slide in supply of existing homes that has more or less evened out the drop in demand. Redfin data showed 1.37 million US homes were up for sale in May, which was the lowest inventory going back to 2012.
We saw rebounded earnings in the first half of 2023, an AI boom, and we also saw travel back. There was an average of 2.65 million US airline travelers per day in the week leading up to the Fourth of July, which was higher than any seven-day period in 2019 pre-pandemic. Delta and United, they’re both up over 40% this year on that trend.
And with cruises expected to see a record number of bookings this summer, Royal Caribbean and Carnival have more than doubled. Conferences are back, Vegas attendance is back, hotel bookings are at new highs.
And our last kind of surprise for the first half of the year is that the Bulls beat the Bears yet again. There was no shortage of things for people to be worried about if they wanted to be worried about things in 2022. But if you stuck with your portfolio, you’ve been rewarded with one of the best first halves on record. Nearly every major asset class has moved higher, which is the polar opposite from 2022.
If you have questions about your portfolio or your financial plan … maybe you don’t even have one and you’d like one. If you’re not sure where to turn, we’ve been helping families since 1983 here at Creative Planning as we manage or advise on a combined $210 billion dollars for families in all 50 states and over 75 countries around the world. Why not give your wealth a second look at creativeplanning.com/radio.
Well, my special guest today is estate planning attorney Megan Kelly, and she practices in the area of estate and transfer tax planning. She earned her bachelor’s degree from the University of Kansas and her JD from the Duke University School of Law. Megan Kelly, welcome back to Rethink Your Money.
Megan Kelly: Yeah, thanks for having me, John.
John: Today I want to talk about something with you that is often overlooked, easily missed, and that’s how we think about estate planning when it comes to college students or our young adult children that have now entered the workforce. They may even still be living at home, or they’re in the military like our oldest son, but they’re over 18. Can you speak a little bit to once a child is no longer legally a child and are considered an adult, what estate planning documents do they need to have in place?
Megan: Absolutely, John. I totally agree with you, very easy to overlook, but we really recommend that all of our clients who are over legal adulthood, so 18, 19, depending on the state, we recommend that they put into place powers of attorney. And those are generally your general financial power of attorney, a healthcare power of attorney, and then in some cases a living will and/or a HIPAA authorization.
John: Off the top of your head, you threw me for a loop there with 19, are there a lot of states that are 19?
Megan: I can really only think of Alabama at this point. That’s standing out to me, but yeah, 18 generally.
John: Typically, 18. If you want to be safe, go with 18. All right, that sounds good. So why are these documents necessary? Maybe we should start there.
Megan: So, prior to your legal adulthood, we have parents who are generally authorized to act on behalf of their kids. They can make their healthcare decisions, they can make financial decisions for you, but once you become a legal adult, that becomes your responsibility. So these documents help us to ensure that parents can continue to act for their children if that’s what their children would like, or for their kids to name someone else to act on their behalf if they can’t act for themselves.
John: Yeah, I could see that becoming a problem where something happens to the child. I’m sure you’ve seen it, parents are at the hospital and trying to help make decisions, and the hospital in some cases says, “Well, this child, I get that they’re your kid, but they’re 20.”
Megan: Yeah, exactly.
John: Do you have any documents here? And you’re going, “Wait, they still live at home, they’re in college. They’re only a sophomore.” Well, do you have any documents? I’m assuming that that can happen, right?
Megan: Yeah, it happens all the time. People go off to school and we tell them, “Please put these documents in place,” and then they try to call the university health system or they try to pay some sort of bill online and the bursar’s office says, “No, no, no. You can’t do this anymore.”
John: Well, let’s start with the healthcare power of attorney. Continuing on with the lovely topic, the exciting topic of being in the hospital, who’s named and what does it cover?
Megan: The child is the client in this situation, so ultimately it is their decision who they would like to name. But commonly we would see a child name a parent or parents as their primary healthcare agent to make healthcare decisions for them if they can’t make those decisions for themselves. And then after their primary agents, they can have a number of backup agents, so another trusted adult friend or relative.
John: You can see where this is a gray area. I have a 21 and a 20-year-old and they’re independent, but they’re also still having us help with certain things. But from a legal standpoint, they’re full adults and so this would be important that we have documents in place. I’m speaking with Creative Planning estate planning attorney, Megan Kelly. How about living wills and HIPAA authorizations? What do those do?
Megan: Living wills and HIPAA authorizations, those are supplemental healthcare documents. HIPAA authorization is usually a list of people who can have access to your healthcare records. So commonly we name the same people that you have on your healthcare agents to make your healthcare decisions for you on that HIPAA authorization so if they call a hospital, they can have access to your records, know that they’re making an informed decision.
And then the living will is the document that gives parents and kids sometimes the most pause. This is the do your best to bring me back document, but if it is not working, it’s okay to withdraw or it’s okay to not do certain life prolonging procedures.
John: Would that cover donation of organs?
Megan: Yeah, it absolutely can. And with organ donation, you want to make sure that you’re consistent across the board. Your driver’s license can sometimes have that designation. Anywhere that you can say, “I want to donate my organs,” you want to check the box.
John: Gotcha. So let’s talk about if this child gets married. They’re in their senior year of college, my daughter meets Prince Charming, she’s running off to marry him. What if I don’t like him, first of all? What if I don’t like this guy? What should I do from a legal standpoint?
Megan: This will be the third time I’ll say it, but the child is the client, right?
John: Ugh, dang it. I can’t stop it, huh?
Megan: So, the child is the one who’s making the decisions.
John: Okay, so if I can’t stop it, what if they need to make a change to documents? Because typically that’s a transition where the child’s going to say, “All right, well I’d like my spouse to now make these decisions, not my parents.”
Megan: All the documents we’ve been talking about today are revocable, changeable, amendable. So what might make sense for an 18-year-old, like you said John, might not make sense when they’re graduating or if they’re entering a different phase of their life. So they just let their attorney know that it’s time to execute new powers of attorney and they can make whatever changes they want, just resign the documents. Financial powers of attorney, healthcare, powers of attorney, all things considered estate planning, these are very inexpensive documents to put in place. This is just saying if something happens to me, this is who I want managing my bills. This is who I want to open my mail. This is who I want to take my dog to the vet if they need to go to the vet. So, anything like that.
John: Yeah, this is who I want to check my Snapchat and my TikTok. Right?
Megan: Yeah, exactly. We might have to check the terms and conditions on that, but yeah.
John: Absolutely. Well, thank you so much for your time here today, Megan, and look forward to having you back on soon.
Megan: Sounds great. Thanks, John.
John: I remember when I was younger in my 20s and having a lot of timelines and goals that I wanted to see achieved. The first of which was getting a job as an airline pilot. I had trained for that. I had flight instructed … built up my hours, and I was based out of LAX and I was in my young 20s and I’m thinking, “All right, I’m hitting that milestone. All right, what’s next? I don’t know, maybe a house? Marriage at some point, if I meet the right person.”
But in retrospect, I put a lot of pressure on myself. In your life, have you ever felt like you needed to make a certain amount of money by the time you turned this age? Or, you need your career to be at a certain place by this timeline? Maybe it’s the day you need to retire, or how much money you need to have saved at different intervals. Sometimes you’ll see those online where you’ll click on it, like “How much money should you have saved by this age to be in the top 10% of Americans? How do you rank? How do you compare?”
Good clickbait, right? Interesting to see how we stack up. But, I think in some cases even if you have a lot of success at achieving those milestones, the feeling too often … I’ve seen it as a wealth manager with very successful people that have achieved most of what they wanted to … is like, “Man, I’ve run really fast and I’ve made a lot of progress and I’ve covered a lot of ground. What am I even running toward anyway? What’s the point in all of this? How much does this milestone actually even matter to me?”
And the Wall Street Journal had a great piece on this that highlighted our life expectancy is changing in the way that we think about a lot of these things. Whether it’s work or love, or where we live, or what we should own, those things are evolving. And, it makes sense. When Social Security was enacted back in the 30s, life expectancy was 62 1/2, full retirement age was 65. The Stanford Center for Longevity did a study on this and they sought to investigate how the timing of major life milestones, which they included as starting a full-time job, starting to save for retirement, getting married, buying homes, starting a family, how that’s shifted over generations.
And their two key findings, which I found interesting, is that across generations the ideal age trajectory for experiencing major life milestones has remained … and this is surprising … remarkably constant. Despite the fact that society is doing things later and later.
Secondly, adults are steadfastly pursuing goals set by a generation nearly a century ago. Perhaps holding on to an increasingly elusive dream is setting up younger generations to fail or feel like they’re failing. But, we live in a different time. So things like buying a house, rising home prices, rising interest rates, it’s made a lot of those things harder.
Here are three tips that I have for you that may help you relax and not stress out quite as much about trying to reach your goals within a certain timeframe. One, remove unnecessary expectations. This doesn’t mean that you don’t have goals, or that you should sell yourself short. It just means have a little grace with certain expectations that in some cases may be out of your control, certainly on the exact timing of when you’ll accomplish those.
Number two, focus on growth not just on hard deadlines. Seek progress, because at the end of the day, a lot of the joy tends to be found in the journey more than the destination anyhow.
And number three, forget the rigid timeline. Yes, you may want to have children, you might want to find your spouse, you may want to buy a house, but saying, “These need to happen by this date or I’ll be unhappy,” don’t put that pressure on yourself. We live in different times than 30 years ago, or 60 years ago, or 100 years ago and as a result, when we achieve certain things, it may look a little different as well. So it’s time to rethink those rigid timelines.
Another piece of common wisdom that we need to rethink is the biggest threat to your retirement is a drop in the stock market. Have you ever thought to yourself, “”Well, that’s my risk, having a big market drop when I’m in retirement. That’s the threat.” Well, not really. Not if your plan is built to account for those drops. Certainly if you are over concentrated only in equities or even worse in one sector, or in the absolute worst case scenario in a handful of individual stocks, well yeah, then the biggest threat to your retirement is a massive drop in value to those securities.
But if you have a great plan and you’ve buffered your stocks with safer investments to get you through market drops, then no, that’s not the biggest threat. In fact, a much more practical threat that I see unaccounted for in plans, and I don’t want that for you, is overpaying when it comes to fees and expenses associated with your portfolio. We know that in life, nothing is free. But fortunately when it comes to your investments, costs have come down significantly over the last 10 years, and that’s relevant because of course, every dollar that’s not pulled out for fees and expenses stays compounding in your portfolio and growing. And the long-term impact of that might be more substantial than you’ve ever really considered.
Here are four of the most common forms of fees; expense ratios, so the cost of the underlying investments if you’re in some sort of fund. Sales loads, those are mostly a thing of the past now with options to work with fiduciaries who don’t charge commissions. But, I still see people paying unnecessary sales loads to brokers because that’s just who they’ve always worked with and how they’ve always paid, even though those can be quite easily avoided now. Transaction fees. Thanks to the biggest custodians, you don’t have to pay one or 2% trading costs anymore. Remember those days? Thankfully, they’re gone. And then, advisory fees. If you don’t want to invest for yourself and you’d like to have a financial advisor helping you, they’ll charge fees as well.
So the question you should be asking always when it comes to costs, how do I maximize value relative to what I’m paying? Here’s an example of how fees erode your returns. If you’re paying a 1% fee on let’s say a $100,000 investment, 40 years later, it’d be at $1.5 million. If everything within your investment performance was identical on that $100 grand over the 40 years but your total costs were 2%, instead of having that $1.5, you had just over $1 million. So that extra 1% in fees erased almost $500 grand from your account balances.
So here’s what I want you to do. Understand and compare fees. When you come in to meet with a fiduciary like us, we will break down exactly what your current costs are so that we can identify whether, “Hey, your fees and expenses are really good, but maybe you’re not getting as much value, or maybe you’re getting great value and the fees are relatively good. Maybe you’re paying way too much in costs that are unnecessary and you don’t need to pay those anymore.” If you’ve never sat down with an independent firm like us here at Creative Planning, we’ve been helping families for 40 years managing or advising on a combined $210 billion of assets, and we will build you a comprehensive financial plan, or review your existing one at no cost. We help over 60,000 clients in all 50 states and over 75 countries around the world.
Why not give your wealth a second look? To meet with a local advisor, visit creativeplanning.com/radio. Now, our next piece of common wisdom is that a long-term investment means over five years. Let’s rethink this one together, shall we? I’ve met with 65 year olds who say, “John, I can’t be a long-term investor. I’m retired and I’m 65. I’m getting older. I’m not a long-term investor. I’m not 30 anymore.” Let’s just say that person lives to 90. That means that some of the money currently in their account will still be there, assuming they don’t run out of money, in 25 years. That’s a lot longer than five. So I would think from a long-term perspective more as a lifetime. That’s long-term investing. I’m investing for the rest of my life, not for five years. So think in terms of holding most of your investments over the remainder of your lifetime, and what would that be?
Well in 2023, life expectancy according to Macrotrends is just under 80 years old. In 1993, it was 75. So in the last 30 years, life expectancy here in America has gone up by almost five years, which is fantastic for humanity, great for relationships. We get to spend time with our kids and our grandkids longer than we ever have before, extra golden years with our spouses, but it’s not always a great thing financially because now you need money for an extra five years that previous generations just didn’t need. And here’s how thinking long-term will help you achieve better investment outcomes. Long-term investments almost always outperform investments geared for short-term because short-term investments are designed to be more stable. But if it’s monies you don’t need for 15 years, again, I keep saying it, but even if you’re still alive at 85 and maybe you’re going to live all the way to 105, you better have some monies that are growing.
So, it allows you to be a little bit more growth oriented even in later years. Thinking long-term also helps you avoid emotional trading because you’re not as worried about what the investments will do over the next one or two years. You’re thinking over a lifetime. Remember, the stock market has posted positive returns over every single 20 year period. Keep that in mind as a long-term investor and remind yourself that riding out temporary market downswings, consider it a sign of a good investor. You should expect to have to do that.
And back to the costs that erode your returns that we just spoke of, investing long-term cuts down on costs and allows you to compound any earnings you receive from dividends because you’re not hyperactively making adjustments. You’re focused on the long haul. So the next time you’re wondering if holding an investment for five years makes you a long-term investor, let’s rethink that and expand the time horizon to an investment plan that works for the rest of your life.
Well, it’s time for listener questions and you can submit your questions to email@example.com and the team and I will answer those for you. I’m going to hand it over to one of my producers, Lauren, for this week’s questions. Hey, Lauren.
Lauren Newman: Hi, John. Our first question comes from Doug and he’s writing to us about the pros and cons of paying off a mortgage. He writes, “I’m weighing the pros and cons of paying off my mortgage after I retire. Here’s my background. Divorce late in life had me effectively starting over with a mortgage, went into a 7/1 ARM, or adjustable rate mortgage, with my eyes open to the downside about seven years ago. So, I have enjoyed a low discounted rate until recently. Expecting rate to jump to six or 7% soon. My balance is about $150,000 on $220,000 borrowed. House is probably worth about $450,000 in this strong local market, if I can believe Zillow. Planning to retire this calendar year. IRA and 401k balance is greater than $800,000, about 60% in stocks so it jumps around a bit. Most of the 401k is pre-taxed, so distributions will be taxed.”
“Other cash assets are greater than $50,000. Income, Social Security and a pension after retirement is about $85,000 a year. I’m thinking I want to stay in the house for at least another 10 years. I’m in good health and like the area. One way of thinking about taking a distribution to pay off the balance after I retire is that I’d be earning six to 7% on the money since I’d be removing the monthly mortgage interest payments from my budget. On the other hand, the $150,000 would now be moved into a relatively non-liquid asset. I’d be interested in your opinion on this. Thanks.”
John: Well, I love this question, Doug, because it applies to so many listeners. Let me begin by saying if you are incredibly stressed out by having a house payment and the fulfillment and peace you will achieve by saying, “I am debt free, I don’t owe anyone anything” is going to completely decrease your stress and your anxiety, and most importantly, your financial plan and all of your objectives are going to work regardless, and you don’t mind in almost all projections, dying with less money and being okay with the fact that on paper it’s not the strategy that is likely to produce the highest net worth, then I don’t have a problem with someone paying off their mortgage. Now without Monday morning quarterbacking too much, the 7/1 ARM and then not refinancing over the last few years when 30 year mortgages were in the threes, that was certainly a mistake because that would’ve rendered this question irrelevant.
It certainly wouldn’t make sense to pay off a three or a 3 1/2% 30 year fixed rate mortgage. So if we sidebar from Doug specifically for a moment, if you have a mortgage that’s under 4%, inflation was just at eight. It’s still above five, which is making your payment easier and easier every single year due to inflation because your mortgage payment is fixed. It won’t change for 30 years, assuming that it’s a fixed rate mortgage. Doug, for you specifically, I don’t love needing to get a 6% mortgage right now, but I would take out a 30-year fixed rate mortgage on the $150,000 you still owe. Payment’s not going to be very high. You’re dating that mortgage, not married to it. As rates decrease, which they’re highly likely to do over the coming years, you refinance to a fixed rate mortgage again at 30 years with a lower rate.
It’s a little bit more of a decision with rates as high as they are right now, but you hit the nail on the head when you talked about liquidity. You pay off your house, unless you take a sledgehammer to the sheet rock and pull the money out of the house, it will just be there until you pass away. And then whoever inherits your home, they’ll take a sledgehammer to the walls and grab the stacks of $100 bills that you never used in retirement.
So here are a few of the bullet points I talk about in The Retirement Flight Plan, my second book, one, your mortgage doesn’t affect your home value. This might be somewhat obvious, but your home value is going up and down completely unrelated to whether you paid cash or whether you have a big mortgage on it, so it won’t stop you from building equity in your house.
Secondly, a mortgage is cheap money. Even at today’s rates, mortgages because they’re collateralized with the real estate and require you to have some of your own money down, assuming it’s not like a 0% VA loan, make it low risk debt for lenders, which is why they offer such low rates relative certainly to credit cards. But even revolving floating rate debt or auto loans, mortgages are typically going to be the cheapest money you can borrow.
Number three, which I just touched on, mortgage payments get easier over time. Think back to the first month that you had a mortgage payment. What was it? If you’re 60 or 70 years old, you might be thinking to yourself, “Oh, I think my mortgage payment was $400 bucks.” Put another way, if every 20 to 30 years your money has to double just to keep pace with inflation, when you reverse that and apply it with a mortgage, that means that every 20 to 30 years, your mortgage payment, practically speaking, is cut in half in terms of how easy it is for you to make that payment.
Next, mortgages allow you to sell without actually selling the home. You keep the money working for you, usable for you rather than needing to die or sell the home to benefit from your equity. And my last benefit to carrying a mortgage is that it provides liquidity and flexibility, which might be beyond everything else most important. What good is your money if you have no access to it? There aren’t prepayment penalties on your mortgage, meaning if you carry a mortgage and 10 years into the 30 years something changes in your life and you decide it’s in my best interest to get this thing paid off, you’ll wire the money to the bank and your mortgage is paid off.
Thanks so much for that question, Doug. I believe there are a lot of Americans asking similar questions to you when it comes to their homes. All right, Lauren, who’s next?
Lauren: So, this question is from Stan in Fargo, North Dakota, and he writes, “With a potential government shutdown looming in the fall, I read I should be looking to the Treasury market to protect myself from risk. Do you agree with this?”
John: Stan, thanks for that question. Well, I think in short, I agree with it but maybe not for the same broad reason that you’re thinking. And to back up briefly for listeners that aren’t familiar, there’s concern that the markets might negatively react if the government were to shut down because they fail to appropriate spending for the upcoming fiscal year, which is October 1st. So from a historical perspective, government shutdowns create a real strain for parts of the economy and for employees and contractors that are doing business with the government. The aggregate impact though to the overall economy has been very minor and fleeting because the government tends to appropriate back pay and resumes expected payments.
So do I think you should be looking to the Treasury market to protect yourself? I think you should always be looking at those types of investments to withstand short term volatility, because if it’s not a government shutdown, it’s a global pandemic or it’s a terrorist attack, or it’s high inflation, increasing interest rates, de-globalization, an impeachment, an earthquake or on and on. I mean, you get the idea.
There’s always uncertainty in life and surrounding our country and the world, and as a result, the expected earnings of the largest companies that exist within that uncertain world. And so maybe the most important part of any investment plan is preparing for that uncertainty. And I already spoke about it earlier, it’s far too hard to time the market getting in and out, and so often the question isn’t should I be in or out of the market? It’s that you should be partly in and partly out. And when I say out, I don’t mean cash. I mean strategically in fixed income that’s especially right now, still earning some really nice yields so that you’re well diversified and that you have short term monies that are stable, in this case of Stan’s question, in the event of a government shutdown or one of a million other scenarios that will inevitably occur. Thanks for that question, Stan. Lauren, what’s next?
Lauren: This question is from Mike in Denver. He says, “I recently turned 40 and want to make sure I’m on the right track for retirement. What are the essential steps I should be taking between the ages of 40 and 50 to effectively prepare for retirement? I currently have a 401k through work with roughly $380,000 plus a trust with $150,000. I purchased a home in 2013, refinanced in 2020, and have about $200,000 equity in it.”
John: So first off, Mike, congratulations. It looks like you’ve got a great start on your retirement for being only 40 years old and presumably having a long time horizon before you’ll need the assets. You’re on a great path. A simple way, and by the way, this is not a replacement for a legitimate financial plan, would be take your current income, multiply it by 25, that’s about what you will need as a ballpark for retirement. So if you’re making a $100,000 and that’s what you’re going to need to live on in retirement, you’ll need about $2.5 million. And while this is definitely me talking my book, higher a great financial planner, have a comprehensive financial plan done running various scenarios, looking at it within the context of your specific situation. Things like do you plan on having more kids? Are you happy in the house that you’re in right now? Do you plan on moving? Do you want to leave an inheritance? Are you going to be helping your kids with college?
All of those different decisions, plus 1000 others, should be considered in a comprehensive financial plan. And many great planners will offer that to you at no cost. Find a local financial advisor, build a detailed plan, monitor that on a regular basis and you’ll know exactly whether you’re on track or not. We have an office there in Denver. We’d love to help you here at Creative Planning, Mike. But if it’s not us, I encourage you go find someone that you trust who can help you design that financial plan. And, you can request that by visiting creativeplanning.com/radio. All right, Lauren, do we have one more?
Lauren: Our last question is from Sarah in Minneapolis, and she says, “Hi, I’m considering borrowing from my 401k, but I’m worried about depleting my retirement savings. What factors should I consider before making this decision?”
John: Because I don’t know anything else about your situation, the short answer is no. But the answer would be yes if it was either to borrow at a reasonable interest rate that you’re paying to yourself from your 401k or take out high interest credit cards. So if you’re really out of options, the 401k is better than 25% plus credit card debt, but over time, borrowing from your retirement plan can significantly harm your long-term savings because even if you pay back every loan you take out, you’re missing out obviously on the benefit of compounding interest. In many plans, you are unable to receive an employer match while you have an outstanding balance, which is the only, to my knowledge, 100% return on your money the day that it goes in. So you want to be receiving that match.
It’s also worth noting that if you change employers, in many cases, you’re required to pay off the balance in full when your employment ends, which if you had to borrow the money in the first place, you probably don’t have it. So that can create a huge challenge that I’ve seen for people needing to cash out a plan that they don’t have the money for.
If you have questions just like these folks, you can submit those to firstname.lastname@example.org, and I’ll either answer those on the show or offline directly with you.
I want to conclude today with a story about cycling. No, not the doping scandals. I’m not talking about Live Strong bracelets. I want to talk about British cycling. I know, it’s on the homepage of your ESPN right? That’s what you follow, British cycling. Well since 1908, British Cycling is just terrible. Failure after failure. In fact, they only had one gold medal in the Olympics and zero wins in the Tour de France. That’s it. While other countries were just racking up victories and accolades, UK was feeling a little embarrassed, basically left in the dust. But that all changed when Dave Brailsford became the British Cycling’s new Performance Director, and that was in 2003. Brailsford had a nearly impossible task. How do I help this team of perpetual losers overcome? How do we get there? Well, he applied something that’s totally relevant in our lives and can pertain to our money as well.
He was all about the aggregation of marginal gains. So he broke down every element of bike riding and found small, fractional ways to improve these things by 1%. A mere five years after hiring Brailsford, British Cycling won 60% of the gold medals at the 2008 Olympics. At the 2012 Olympics, they set seven world records. From 2012 to ’17, a British cyclist won the Tour de France five times, and World Championships and records just kept piling up. When looking back on his time there, he didn’t change anything that was, at least at a surface, monumental. He made small improvements starting with their habits. You see, habits are the key to all of us reaching our goals. I don’t know if you’re like me, but sometimes when you focus on the goals themselves, it can be all consuming. It can be overwhelming.
If you’re 40 and you want to have $3 million saved at 65, it’s like, “I don’t know, that sounds amazing. That’s my goal. How the heck do I get there?” That’s just daunting. But while we may take giant steps in our progress, the real results, they come when we make small changes. One of my favorite books, Atomic Habits, has these four tips to reaching your goals by building the right systems.
So number one, make it obvious, make it attractive, make it easy, make it satisfying. Even if that’s just a 1% change, think of what a difference just 1% makes when added up over long periods of time. And remember, we’re the wealthiest society in the history of planet Earth. Let’s make our money matter.
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Disclaimer: The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm that manages or advises on a combined $210 billion in assets as of December 31st, 2022. John Hagensen works for Creative Planning, and all opinions expressed by John or his guests are solely their own and do not represent the opinion of Creative Planning or this station.
This commentary is provided for general information purposes only. It should not be construed as investment, tax, or legal advice, and does not constitute an attorney-client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.
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